Unarranged overdraft charges outstrip payday loan costs

Unarranged overdraft charges can cost nearly eight times more than payday loans, according to Which? research.

The research, released today (February 8), compared the cost of borrowing £100 for 30 days between unarranged overdrafts and payday loans.

Which? said unarranged overdraft charges at some banks were as much as seven and a half times higher than the price cap of £24 imposed by the Financial Conduct Authority (FCA) on payday loans.

In November last year the FCA set forward measures to tackle issues such as excessive overdraft charges and levels of switching.

Which? said that because bank overdraft charges apply to a consumer’s monthly charging period, not the number of days the money is borrowed for, consumers who need £100 could pay up to £180 in fees if they borrow across two charging periods.

The charging period is the period each month in which charges are accrued on a consumer’s account before they are charged to the account holder.

Which? reviewed the unplanned overdraft charges levied by banks in January 2017, on fee-free accounts with no minimum monthly payment compared to the FCA price cap on payday loans.

Which? assumed the customer had already used up a £1,000 planned overdraft facility, and included all additional daily or monthly charges that applied as a result of the emergency borrowing.

The research examined the costs of borrowing over a single monthly charging period and across two charging periods with 15 days spent overdrawn in each charging period.

Analysts found that the extra costs of borrowing £100 ranged between around £20 and £100 during a single charging period and around £20 and £180 for two charging periods.

In response to the findings NatWest said: “We encourage all of our customers to contact us if they are going to enter unarranged overdraft regardless of the amount or the length of time.

“We offer a number of alternative solutions, such as putting an arranged overdraft in place, where the costs are considerably less.”

Barclays said it does not provide unarranged overdrafts and any emergency borrowing must be pre-agreed.

Which? said banks, which set their own monthly maximum charges for overdraft borrowing, should not be able to charge more for unarranged overdrafts than they do for arranged overdrafts.

Mike O’Connor, chief executive at StepChange Debt Charity, said: “Every day we help people who have regularly exceeded their overdraft limit and been hit with extra fees and charges. This has made getting back on track the next month an even more difficult challenge.”

StepChange Debt Charity said its research found almost three million people a year use overdrafts just to meet everyday expenses.